Fed's Williams says low neutral interest rate era is not over

By Michael S. Derby

Aug 25 (Reuters) - Federal Reserve Bank of New York President John Williams said Monday that the era of persistently low underlying interest rates does not appear to be over, based on his reading of the data.

Williams, whose comments came from the text of a speech prepared for a conference in Mexico City, spoke about R-Star, which is an estimate of the interest rate that has a neutral impact on the economy. He did not comment on the outlook for monetary policy in the prepared speech.

Noting the long-running factors affecting underlying interest rates, Williams said, "The global demographic and productivity growth trends that pushed R-Star down have not reversed."

Growth-adjusted R-Star for the U.S., Euro area, U.K. and Canada is around 0.5% and that is similar to the pre-pandemic period, Williams said.

“The era of low R-Star appears far from over,” Williams said.

Some events in the last several years have made estimating R-Star challenging, such as surging inflation related to the pandemic. That prompted aggressive interest increases by central banks around the world.

Fed officials have been steadily raising estimates of their longer-run interest rate target, suggesting a fundamental shift in the economy toward higher borrowing costs.

Williams’ comments suggested that low rates will return at some point given the economic forces that have led to a low R-Star estimate.

But he also noted in his remarks that “policymakers are well advised to avoid placing too great confidence in precise estimates” of things like R-Star given uncertainty around some of the economic factors used to divine the value.